Hong Kong: The Right To Arrest In Respect Of A Dispute Under A Sale And Purchase Agreement

Last Updated: 7 October 2011
Article by Rory Macfarlane and Su Yin Anand

Birnam Ltd v. The Owners of the Ship or Vessel Hong Ming [2011] HKCFI 577

In the recent case of Birnam Ltd v. The Owners of the Ship or Vessel Hong Ming, the Hong Kong Courts set aside a Warrant of Arrest obtained by the Buyers under a sale and purchase agreement. The judge also ordered that there be an enquiry into damages for wrongful arrest. The case offered a rare opportunity for practitioners and the Court to re-visit the issues of whether a ship can be arrested in respect of a sale and purchase dispute and the extent of the arresting party's duty of disclosure.

The background facts

The owners of the vessel Hong Ming ("the Sellers") entered into a Memorandum of Agreement with Star Matrix Ltd or nominee for the sale of the Hong Ming ("the Vessel"). Birnam Ltd were nominated as the Buyers. The MOA was signed on 19 July 2011 in similar wording to the 1987 Norwegian Sale Form.

Clause 2 of the MOA provided that a 20% deposit in the sum of US$663,968 was to be paid by the Buyers "... as security for the correct fulfilment of this contract ... within 3 New York/London banking days from the date of both parties signing this MOA ...". However, by 26 July 2011, the Buyers had only paid a deposit of US$400,000. On 27 July 2011, the Sellers cancelled the MOA.

The Buyers then sought to negotiate further with the Sellers to keep the sale alive albeit on revised terms. Among other things, the Buyers were insisting on being allowed to inspect the Vessel in Hong Kong. The Sellers initially refused and, on 3 August 2011, the Buyers sent a message to the Sellers declaring that the "previous MOA is null and void" and demanded the return of the deposit monies. The Sellers subsequently ordered the Vessel to sail to Hong Kong for the inspection. She arrived on 14 August 2011 and was immediately arrested. Unknown to the Sellers, 10 days before on 3 August 2011, the Buyers had obtained a Warrant of Arrest. No inspection took place. The Sellers applied to set aside the Warrant of Arrest.

The Buyers' case

The Buyers' claim was pleaded as one for possession or ownership of the Vessel or alternatively, for a refund of the sum of US$400,000 and damages. In the application for the Warrant of Arrest, the Buyers claimed that they were entitled to specific performance of the MOA and that they had acquired a right or interest in the Vessel by way of the partial payment of the deposit.

The Court's decision

The Court held that neither the 1952 Arrest Convention nor section 12A(2) of the Hong Kong High Court Ordinance (Cap 4) allowed a party to arrest for claims arising from contracts for the sale of a ship.

The Buyers sought to argue that their claim fell under section 12A(2)(a) of the Hong Kong High Court Ordinance, namely a claim for possession or ownership of a ship, or to the ownership of any share therein. The Admiralty judge, Reyes J., gave this argument short shrift. He held that:-

  • The MOA had been terminated as a result of the Buyers' failure to pay the full deposit. It followed that property in the ship must now be fully vested in the Sellers.
  • There can be no prospect of obtaining specific performance of a contract that had been terminated.
  • The deposit was expressly payable as security for performance by the Buyers of their obligations as Buyers. On the terms of the MOA, it could not be asserted that the retention of part of the deposit by the Sellers enabled the Buyers to assert a proprietary right in the ship.
  • There was absolutely no basis for the Buyers' claim and the Warrant of Arrest should not have been issued. The arrest was set aside and indemnity costs awarded to the Sellers.
  • The Sellers were entitled to treat the part payment of the deposit as forfeited.

Having set aside the Warrant of Arrest, the Court then focused on the Buyers' conduct in obtaining it in the first place.

The application for arrest had not been made to the Admiralty Judge, but to a duty Judge, despite the fact that the Admiralty Judge was in Hong Kong on the day of the application. Reyes J. held that the Buyers had failed to make full and frank disclosure of the fact that 'conventional wisdom' is that their claim did not fall within the claims giving rise to a right of arrest. In the supporting affidavit, the Buyers had made the bare assertion that they had such a right. He went on to state that, at the ex parte stage, Birnam had failed to provide the duty Judge with a 'fair and even-handed analysis' of the authorities in connection with how such interest was alleged to arise.

The Buyers' conduct was further criticised in that they failed to disclose the negotiations which took place following the issue of the Warrant of Arrest which culminated in the Sellers bringing the ship to Hong Kong. The judge emphasised that the duty of full and frank disclosure is a continuing one.

The Court held that the circumstances surrounding the arrest justified an order of damages for wrongful arrest. The evidence suggested that the Buyers had proceeded with the arrest in a 'cavalier fashion' when they failed to address their mind to the issues arising from their claim and their disclosure obligations. The Court felt the evidence suggested that the request for the inspection of the Vessel was merely 'a ruse' to get the Vessel into Hong Kong so that it could be arrested. The arrest could then be used by the Buyers as leverage to negotiate a new MOA on more favourable terms. This motive, coupled with the "cavalier" attitude, amounted to a misuse of the arrest process. The arrest was therefore carried out with 'malicious negligence'. The Buyers' tactic could not have been "a sincere use of the arrest mechanism to enforce a genuine in rem claim".

Comment

The case confirms that a claim for breach of a contract for the sale and purchase of a ship does not trigger the arrest jurisdiction under the 1952 Arrest Convention or Section 12A of the Hong Kong High Court Ordinance.

A buyer might have a right of arrest if the terms of the MOA provide that it acquires a right or interest in a ship upon payment of a deposit. However, any buyer attempting to arrest on this basis must exercise caution when applying for the Warrant of Arrest. The arresting party must give full and frank disclosure, and the duty to do so is continuing. Where the legal basis for the claim is uncertain, the judge hearing the application for the Warrant of Arrest must be provided with a fair and even-handed analysis of the authorities. Failure to do so will expose the arresting party to a risk of a claim in damages for wrongful arrest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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